Friday, May 20, 2011

"Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute..."

From Dow Jones via Morningstar:

Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute...

That's one reading of the minutes from the Federal Reserve's April 26-27 Federal Open Market Committee. The strategy makes sense from an economics' standpoint; but it carries risks on both the political and growth fronts.

According to the minutes, Fed officials continue to think the impact from higher commodity prices will be "transitory."

The bigger concern would be if wage increases took hold. After all, labor remains the biggest expense for most U.S. businesses. If wages were to increase rapidly, companies would be under more pressure to raise their selling prices--which would cause workers to ask for bigger raises to cover the higher prices.
So far, the Fed sees little evidence of that inflationary cycle--mostly because there is so much slack in the labor markets.

"Signs of rising wage pressures were reportedly limited to a few skilled job categories for which workers are in short supply, while, in general, increases in wages have been subdued," the minutes said.

And as long as the pressures on labor costs remain muted, "a large, persistent rise in inflation would be unusual," the minutes added.

In other words, higher prices concentrated in energy and raw materials won't bring a response from the central bank. But if wages pick up, the Fed may step in....MORE